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When The Stock Market And Economy Do Not Match

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Forge Your Wealth is meant for education and entertainment and should not be used for financial advice.

As if it’s not bad enough that we are facing unprecedented times, the stock market needs to be confusing? Despite the ever present Coronavirus and the rapid rise in unemployment, the stock market has rallied. My portfolio is just a little shy of full recovery. Yet 22 million people (likely more later) have filed for unemployment since the start of the crisis in March. The stock market is supposed to match the economy, that is why indexes like the S&P 500 and Dow Jones are used as indicators for the growth of the economy. Why does the stock market and economy not match up? Is there something that many investors are missing out on? Is the stock market being manipulated?

Why Does The Stock Market Not Match The Economy?

Why do you think the stock market and economy are brought up separately? They are two different things. The economy is a collection of financial tradings, the stock market is only one aspect of the economy where company equities are traded. While the stock market can reflect the economy the stock market could go in different directions than the general economy. That is especially the case since many indexes only measure the performance of a handful of companies.

Even the broadest indexes cannot reflect the performance of the entire economy. Most indexes leave out at least some public companies and every private company. Furthermore, many indexes of the stock market leave out other assets such as bonds and real estate.

Is There Something Many Investors Are Missing Out On?

Ah, this question. You know what the fear of missing out is? Greed. Do you have any idea of how much the economy is driven by the fear of missing out? My generation is the largest living generation, probably the largest of all time and 70% feel the fear of missing out. This drives us to spend more, yes, even for investments.

The Coronavirus Pandemic is devastating. It is still a massive factor in the economy, even more so than other global events like the oil price war, which would be dominating headlines otherwise. With every headline the Coronavirus makes investors more zealous than starving vultures. Every rumor of a vaccine, new cases, flattening of the curve, and whatever else makes it sound like the apocalypse or salvation is near is pushing investors to trade equities.

Greed Beats All Other Fears Every Time

Do you think a little lack of money is going to stop investors? I know that is a ridiculous sounding question, but think about it. With the stimulus checks, many people will have extra money. Many who have lost work will need to use it for rent and food, you know the essentials. Many still have work though and do not need the money as much. With many stores closed and pretty much the only shop open right now being Amazon and other delivery companies people can either spend more money for delivery, save their money or invest. As hard as it is to believe, many people have sufficient savings so they do not need to save much more.

The stock market dropped faster than a rock in February. It started people talking about how the stocks reflect the Great Depression. That means two things to an investor: a lower balance in portfolios, and excellent opportunities to buy equities. Investors, veteran and newcomers, will believe they will miss out if they do not invest now. Since the last time markets went this far down was apparently the Great Depression this is a once in a century opportunity for investors. With the stimulus checks, people will have extra money. What do people do again if they have a sudden influx of money? Frequently spend it unwisely. While I am more for spending $1,200 on assets than an auto loan, timing is important when investing a lump sum, and I do not believe the stock market is quite at the bottom yet.

The Worst May Be Behind Us Pandemic-Wise

I dare say that most of the world has either faced the worst part of the first wave of the Coronavirus Pandemic, or is facing the worst now. Don’t hold me to that, I am a biochemist and virologist, not an epidemiologist. I do not think you need too much optimism to believe that economies and businesses will start the process of reopening. I do think you do need immense optimism (and maybe something else) to believe the world will return to normal quickly.

Many Industries Are Hurting

The two most impacted industries are almost hands down travel and food. Restaurants are either closed, or only do delivery and takeout in America. Ironically, no one is taking cash. The sad reality is that this may be the dominant business model for restaurants in the future. The most experts expect is 50% of business from dine-in compared to pre-pandemic. Maybe delivery and takeout will be significantly popular and restaurants will need to hire more drivers and delivery people. That may ease the new business models, but expecting waiting staff to switch to delivery drivers is not unlike expecting a wood carver to switch to work an assembly line to manufacture furniture. The transition will be bumpy, at the least. It is unlikely that everyone furloughed or laid off will have a job in the restaurant business after this.

Imagine how the travel industry feels. Most people are ordering delivery and takeout. Who is traveling? Seriously asking. It is hard to find someone willing to travel in a flying tube full of recycled air or in cramped quarters floating on water, oh did I mention there may be a potentially virus in those modes of transportation? This is not likely to pick up to sustainable levels before the end of the years. There may be some hope though. Travel agents will be in much higher demand to perform research and insurance measures to make sure travelers are not stuck internationally due to quarantines. However, travel agents are skilled workers. It is not expected that flight attendants nor sailors will have an easy time transitioning between those jobs.

Different Types Of Employment

The recession will not only affect travel and food. In addition to many people feeling like their jobs are at risk, some could see differences when they return to work. Other industries will have to follow the guidelines for social distancing. At the very least people will be wearing masks at work. There are words about changing work structures, my employer is talking about changing a few things at work including placement of researchers and modified work schedules. How the Coronavirus affects other industries will depend on the needs and flexibility.

Other industries will have to switch gears in productivity. Not only will workers need to come back and relearn how to work from outside their homes, but adjust to the new work structure. The readjustments may be beneficial in the long term, but they will need to be broken in like a new pair of uncomfortable boots.

How This Affects The Stock Market

Many people are unemployed and need help. The stimulus checks Americans received provide some relief there. To the others who did not need relief, this is extra money. Sure there are still ways to spend money, but 15 million Americans are planning to invest their stimulus checks instead, an investment of $18 billion. This is not an illogical response. Despite the way things look the economy will recover, just more than likely not this year. Even with the rebound, the S&P 500 is still lower than its peak in mid February. Many equities are still on sale. I would have invested more if I was not planning on buying a newer car with cash before the end of the year. My Grand Am will expire sometime in the future (hopefully not near future).

The US government is a lot of things, but it is not a conglomerate of people who lack intellect. (You can probably tell I had to word shop this to make that statement as accurate as possible while avoiding insults). They knew this would happen. The government is yet to issue permissions to the Federal Reserve to start purchasing stocks, a move that would be the first in its history. While this is a historical time, I believe the government is trying to make sure that they do not have to order this policy. For some odd reason Americans don’t like the idea of the government using taxpayer dollars to ensure stock investments still grow. Furthermore, businesses do not like the government being very hands on, imagine how businesses would feel if the government is a controlling shareholder.

Benefits Of Such Stimulus

Providing stimulus checks to Americans who do not need it may seem like the same thing. After all the stimulus checks are paid for by the taxpayers and… going back to the taxpayers. That’s why it is not the same thing. The stimulus checks ensure these investments are performed much more democratically than it would if the government just purchased stocks. This ensures that the stock market has some extra oxygen for its massive hit (likely second wave) and the slow down we expect. It may sound like we are doing this for the wealthy, and we are. But we are also doing this for the many people who have retirement funds in the stock market and now more than ever may lack the ability to return to the job market during troubling times.

The Stock Market Rally

The rally may appear to be unnatural during these economically rough times, but the headlines during the rally suggested easier time pandemic-wise and the stimulus package provides people with much needed economic ease. The investment part of the stimulus is just another branch of the relief and that caused the rally.

Just because the stock market rally is natural does not mean that it is sustainable. The fear of missing out from equity sales due to the Coronavirus was incredibly strong. It made me adjust my investments a little myself, and I try to make myself resistant to the fear of missing out. However, there is still much economic turmoil we will have to face and the Coronavirus will slow down the recovery.

While the stock market does not always reflect the economy, it is far from resistant to economic turmoil. The stock market and economy are linked. Since the economy is larger than the stock market it would be expected for the stock market to move after the economy goes down or up even if it lags behind. The stock market rally is not a sign that the economy is healing, just a sign that Americans are hopeful for the future of the economy.

Is The Stock Market Being Manipulated?

If the government did in fact plan that some of the stimulus checks would be invested in the stock market, yes, that is pretty much the literal definition of manipulating the stock market. But it is worth mentioning that the stock market sways to literally everything going on. Even throwing a penny into the stock market manipulates it (not by much though). The stock market was designed to sway in price from supply and demand. That does not make the stock market a scam, it actually prevents scams. There are many other ways people manipulate the stock market that I will bring up in the future.

Final Thoughts

It is easy to believe that the stock market is manipulated with the recent stock market rally. Can’t argue with the truth. The stock market and economy are different things. The stock market mostly flows with supply and demand of equities. With the stimulus we can expect more demand especially with many equities on sale. The stock market rally is completely natural, just not very sustainable. Note that the rally right now may indicate that now is not necessarily the best time to buy into the stock market, but there could be buying opportunities in the near future.

Author: Papa Foxtrot

Most of my life I was careful with money and learned where I should invest it. I was very lucky to have parents who taught me financial literacy when I was young. Unfortunately, I am very lucky because many people lack the financial literacy I know. The purpose of Forge Your Wealth is to teach people who are just starting out in life how to obtain their wealth or anyone who just realized they may need to learn more to handle their finances. I currently have a PhD in biochemistry, just started a job in industry (will not disclose where exactly for personal and professional reasons) and am currently married to the love of my life. I am one of the lucky few people in America who graduated with no student debts, my wife was not. Over the series of a little over 3 years we paid for our wedding with no debt and paid off her federal student loans.

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